CFPA: Exemption in Name Only?

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When the House Financial Services Committee voted to exempt small banks from exams by the proposed consumer financial protection regulator, it was bully for the little guy. After months of wrangling, community bank lobbyists in October succeeded in convincing the committee led by Rep. Barney Frank (D-Mass) to back an amendment from Rep. Brad Miller (D-Cal.) and Rep. Dennis Moore (D-Kan) granting almost 98 percent of the country's institutions a carve-out from the direct oversight authority of a proposed Consumer Financial Protection Agency.

"The Miller amendment mitigates many of the concerns of the community banking industry," Camden Fine, the president of the Independent Community Bankers of America, told American Banker. In exchange for leaving consumer protection exams in the hands of small banks' current regulators, the community bank lobby toned down opposition to the CFPA proposal that is core to the Obama administration's plans to corral controversial products like payday loans, high-interest credit cards and mortgages.

But as details emerged on the amendment, and industry observers began to absorb the impact of the changes, some have begun to question what exactly these second- and third-tier banks have won. "At first I thought it was being watered down," said Ed Kramer, an executive with compliance consultant Wolters Kluwer Financial Services and a former New York state banking regulator for consumer services. But instead, he says, the bill will codify the CFPA as the last say on financial products' suitability, as well as the "backstop" for regulators who fall down on enforcement. When it comes to consumer regulations, "the CFPA has two things: it still writes the rules of the game, and it's given back-up enforcement authority," said Kramer.

The American Bankers Association also questions just how much relief small banks have gained. "The new CFPA would be able to say they did not agree with the primary regulator, so they can trump the primary regulator at any point and time," says Diane Casey-Landry, the ABA's chief operating officer and senior executive vice president. "It's an exemption in name only."

Critics such as Kramer and Casey-Landry say they worry about the CFPA's veto power on any consumer exam conducted by the Federal Deposit Insurance Corp., the Federal Reserve, or other authority granted consumer protection exam oversight of small banks and credit unions (only credit unions under $1.5 billion in assets get the exemption). The agency would also have the right to strip a prudential regulator's oversight of a particular bank if it disapproved of an exam or felt an enforcement action inadequate (only the Treasury Secretary would stand in the consumer agency's way). The CFPA would also have the authority to carry out its own penalties - both public and nonpublic - based on consumer complaints.

Small bank proponents fought for and won the exemption by persuading lawmakers that the bill would be a financial and compliance burden to community institutions that were the least culpable in the explosion of subprime mortgages or risky credit-card issuance. That track record assures many that even with the supremacy of CFPA authority on consumer protection, there may be little need to worry that any regulatory body will find problems with Main Street banks. The House committee's decision to drop a requirement for "plain vanilla" lending products would appear to make compliance worries for community institutions even more remote, since concerns were raised this would inhibit small banks from offering, for example, balloon-note loan terms to high-risk or low-income customers.

But Kramer wonders if small banks still face higher compliance costs down the road anyway, since the prudential regulators might step up enforcement in areas like fair lending and the Community Reinvestment Act under pressure from the CFPA and the Obama administration. "When you're a $300-to-$400 million bank, sometimes it's overwhelming because you have examiners coming in every month," said Kramer. "It's the cost of preparing exams, and having dedicated personnel to talk to the examiners.

"Even if the [CFPA] isn't up and running for a year to 18 months, I think most agencies are already going out there and re-looking at how they conduct these exams, especially on the fair lending," he said. "No prudential examiner is going to want to lose that authority."